Navigator Swing Strategy – 100% Cash
It is hard to believe that a week ago today, we were still able to take a long trade off the S&P 500 intermediate trend line. Now, that trendline has broken on the two major indices; the NASDAQ 100 and S&P 500. Nearly two years of higher highs and lows off the March 2020 China Virus lows are over. The NASDAQ 100 has violated its 200-day line this morning and is approaching the October 2021 lows. The S&P 500 sits on its 200-day line, having taken out the December lows at yesterday’s close.
Any doubt that the market long ago lost its footing to fundamentals, instead of anchoring itself to Fed policy, should now be resolved. As the saying goes, bull markets don’t die of old age. The Fed kills them. Indeed, this market is the extreme version of the old axiom. The correlation of the S&P 500 to the Fed balance sheet is alarming, especially when the Fed wants to shrink it.
The Fed Balance Sheet
Government Debt and Deficit Spending are the Real Underpinnings of Current Equity Prices
The question now is, where are the buyers, even if they are only short-term traders? Respecting the S&P 500, will they show up directly at the 200-day line? How about the October lows? Will anyone show up today to bring the market back to the Weekly Expected Move low? Market makers stand to lose a fortune otherwise.
This week, the options market mispriced the downside, surprising given all the risk-off indicators. Anyway, your guess is as good as mine as to when and where the traders will come in again. All we can do is look for a pivot in the price action. The market seems to be falling due to a lack of buyers in many ways. The selling only began to get intense yesterday.
As mentioned all week, we are in the zone for the 20-week low, and the Fed meeting next Wednesday will clear most of the short-term uncertainty. But we do have a significant wildcard in the Russia/Ukraine situation. Russia is all but certain to invade now. That could further negatively impact oil prices (and already has).
And of course, Russia invading Ukraine increases uncertainty over China taking Taiwan, where we get most of our computer chips. But for the Genocide Olympics in Bejing, China likely would be joining Russia now in taking Taiwan. As we all expected, American weakness has had negative consequences in the wake of the Afghanistan withdrawal nightmare.
The last time I felt like this, Jimmy Carter was President. Where is our Ronald Reagan? Where is the exceptional leadership that could carry us out of this morass? Trump hardly fits that bill. It is an awful feeling to revisit the 1970s redux. I wouldn’t say I liked it then, and I like it even less now.
Fundamentals are deteriorating too. For example, Peloton, a darling of the China Virus lockdowns, has temporarily stopped production due to lack of demand.
And then there is Netflix, a member of the FAANGMAN+T club. They disappointed on projected new subscribers in their earnings announcement last night.
Do Netflix and Pelaton signify the end of the Pandemic trade? Probably so. So while there is some sense that the economy has been recovering, it becomes more apparent every day that it is living on borrowed time (and borrowed money). The chance of the Fed overcorrecting on policy tightening looms large.
At one end of the spectrum, the 10-year U.S. Treasury rate briefly poked above its 200-week moving average to break out even higher, potentially. Rates are pushing their 200-week moving average further into a bull market mode, while the benchmark S&P 500 index pokes below its 200-day moving average into a bear mode. And if the NASDAQ 100 still leads, its 200-day line is well into the rearview mirror. Still, it is logical for some stock market traders to buy here, all else being equal.
For now, the slope of the S&P 500 is accelerating into what we call a “waterfall” decline. That is how corrections bottom short-term. In the old days (before the Fed was running the stock market), we would see a scary spike low to bring an end to the first downdraft. Perhaps that will arrive with the Russian invasion of Ukraine or sooner.
Oil prices remain pressured. Ill-conceived Biden administration energy policies and Russian invasion concerns drove oil prices to new post-China virus highs. The higher oil prices are a significant component of our current inflation woes, as oil prices usually are.
Consumer Price Index – Annual Change
Deferred pain is still pain. It is hard to escape the feeling that we must pay the piper now after deferring the Great Recession and China Virus pain. And even when we bottom this initial market decline in subsequent sessions, we will not necessarily go right back to new highs.
I would consider a trading range to be a blessing. But the possibility now of an intermediate bear, with lower highs and lower lows, has increased. Some prominent money managers with white hair and enviable track records picking bubble tops, such as Lacy Hunt, see a 50% decline ahead of us.
And then there is Gold and the convergence to decision time:
Why not a little risk-off move to Gold as Russia invades Ukraine? But treasury rates will now compete for risk-off Gold buyers. If Gold does break to the upside, it is a WWSHD (When What Should Happen Doesn’t) buy signal.
And that brings us to the U.S. Dollar. While critics of the current administration believe that Biden policies weaken the dollar, the evidence is contrary. Higher relative U.S. interest rates are attracting foreign capital, as recently confirmed by the monthly Fed data. All that selling in the U.S. stock market also raises cash supporting the U.S. Dollar as well.
If I were to forecast the stock market like the weather, it would be cloudy with many storms ahead. But we should look for some sunshine to begin in the next few sessions. So I will look for the Navigator Algo to bring us into a swing trade for our first respite rally or back to the top of a new trading range. We are not there quite yet.
Day traders should proceed cautiously today as monthly/weekly options expiration can lead to distortions. The net short overnight inventory and the true gap below the spike put gap rules into play and give some decent odds of an early bullish fade.
If you are inclined to take the fade higher, target yesterday’s RTH (regular session) low at 4465 first and monitor for continuation. While it seems doubtful from current levels, the Weekly Expected Move Low at 4550 still has the potential to act as a magnet into options expiration at the close.
Given the sheer size of yesterday’s spike into the close, letting the ONH (overnight high) at 4477.75 be a long trigger would be fine as well.
Of course, an upside test of the RTH Low at 4465 could be a short setup, somewhat strengthened by the fact that yesterday’s settlement is nearby at 4474.75. Keep your stops tight on any such short trade.
If you want to set up a bearish initiating trade, wait for any early upside corrective activity to cease and cross back down either through the settlement (4474.75) or the RTH (regular session) open. Picking the top inside of yesterday’s significant spike would be a guessing game, at best.
As always, stay tuned. It is about to get interesting. It reminds me of the old saying – when it rains, it pours. Nevertheless, the Navigator Algorithms continue to keep swing traders out of harm’s way.
Have a terrific weekend.
A.F. Thornton